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The American Bar Association Antitrust Section’s Presidential Transition Report (“Report”), released on January 24, provides a helpful practitioners’ perspective on the state of federal antitrust and consumer protection enforcement, and propounds a variety of useful recommendations for marginal improvements in agency practices, particularly with respect to improving enforcement transparency and reducing enforcement-related costs. It also makes several good observations on the interplay of antitrust and regulation, and commendably notes the importance of promoting U.S. leadership in international antitrust policy. This is all well and good. Nevertheless, the Report’s discussion of various substantive topics poses a number of concerns that seriously detract from its utility, which I summarize below. Accordingly, I recommend that the new Administration accord respectful attention to the Report’s discussion of process improvements, and international developments, but ignore the Report’s discussion of novel substantive antitrust theories, vertical restraints, and intellectual property.

In discussing substance, the Report trots out all the theoretical stories of possible anticompetitive harm raised over the last decade or so, such as “product hopping” (“minor” pharmaceutical improvements based on new patents that are portrayed as exclusionary devices), “contracts that reference rivals” (discount schemes that purportedly harm competition by limiting sourcing from a supplier’s rivals), “hold-ups” by patentees (demands by patentees for “overly high” royalties on their legitimate property rights), and so forth. What the Report ignores is the costs that these new theories impose on the competitive system, and, in particular, on incentives to innovate. These new theories often are directed at innovative novel business practices that may have the potential to confer substantial efficiency benefits – including enhanced innovation and economic growth – on the American economy. Unproven theories of harm may disincentivize such practices and impose a hidden drag on the economy. (One is reminded of Nobel Laureate Ronald Coase’s lament (see here) that “[i]f an economist finds something . . . that he does not understand, he looks for a monopoly explanation. And as in this field we are rather ignorant, the number of ununderstandable practices tends to be rather large, and the reliance on monopoly explanations frequent.”) Although the Report generally avoids taking a position on these novel theories, the lip service it gives implicitly encourages federal antitrust agency investigations designed to deploy these shiny new antitrust toys. This in turn leads to a misallocation of resources (unequivocally harmful activity, especially hard core cartel conduct, merits the highest priority) and generates potentially high error and administrative costs, at odds with a sensible decision-theoretic approach to antitrust administration (see here and here). In sum, the Trump Administration should pay no attention to the Report’s commentary on new substantive antitrust theories.

Recognizing that the current state of RPM law in both minimum and maximum price contexts requires sophisticated balancing of pro- and anti-competitive tendencies, the dearth of guidance from the Agencies in the form of either guidelines or litigated cases leaves open important questions in an area of law that can have a direct and substantial impact on consumers. For example, it would be beneficial for the Agencies to provide guidance on how they think about balancing asserted quality and service benefits that can flow from maintaining minimum prices for certain types of products against the potential that RPM reduces competition to the detriment of consumers. Perhaps equally important, the Agencies should provide guidance on how they would analyze the vigor of interbrand competition in markets where some producers have restricted intrabrand competition among distributors of their products.

The U.S. Justice Department (DOJ) and Federal Trade Commission (FTC) largely have avoided bringing pure contractual vertical restraints cases in recent decades, and for good reason. Although vertical restraints theoretically might be used to facilitate horizontal collusion (say, to enforce a distributors’ cartel) or anticompetitive exclusion (say, to enable a dominant manufacturer to deny rivals access to efficient distribution), such cases appear exceedingly rare. Real world empirical research suggests vertical restraints generally are procompetitive (see, for example, here). What’s more, a robust theoretical literature supports efficiency-based explanations for vertical restraints (see, for example, here), as recognized by the U.S. Supreme Court in its 2007 Leegin decision. An aggressive approach to vertical restraints enforcement would ignore this economic learning, likely yield high error costs, and dissuade businesses from considering efficient vertical contracts, to the detriment of social welfare. Moreover, antitrust prosecutorial resources are limited, and optimal policy indicates they should be directed to the most serious competitive problems. The Report’s references to “open important questions” and the need for “guidance” on vertical restraints appears oblivious to these realities. Furthermore, the Report’s mention of “balancing” interbrand versus intrabrand effects reflects a legalistic approach to vertical contracts that is at odds with modern economic analysis.

In short, the Report’s discussion of vertical restraints should be accorded no weight by new enforcers, and antitrust prosecutors would be well advised not to include vertical restraints investigations on their list of priorities.

3. IP Issues

The Report recommends that the DOJ and FTC (“Agencies”) devote substantial attention to issues related to the unilateral exercise of patent rights, “holdup” and “holdout”:

We . . . recommend that the Agencies gather reliable and credible information on—and propose a framework for evaluating—holdup and holdout, and the circumstances in which either may be anticompetitive. The Agencies are particularly well-suited to gather evidence and assess competitive implications of such practices, which could then inform policymaking, advocacy, and potential cases. The Agencies’ perspectives could contribute valuable insights to the larger antitrust community.

Gathering information with an eye to bringing potential antitrust cases involving the unilateral exercise of patent rights through straightforward patent licensing involves a misapplication of resources. As Professor Josh Wright and Judge Douglas Ginsburg, among others, have pointed out, antitrust is not well-suited to dealing with disputes between patentees and licensees over licensing rates – private law remedies are best designed to handle such contractual controversies (see, for example, here). Furthermore, using antitrust law to depress returns to unilateral patent licenses threatens to reduce dynamic efficiency and create disincentives for innovation (see FTC Commissioner (and currently Acting Chairman) Maureen Ohlhausen’s thoughtful article, here). The Report regrettably ignores this important research. The Report instead should have called upon the FTC and DOJ to drop their ill-conceived recent emphasis on unilateral patent exploitation, and to focus instead on problems of collusion among holders of competing patented technologies.

That is not all. The Report’s “suggest[ion] that the [federal antitrust] Agencies consider offering guidance to the ITC [International Trade Commission] about potential SEP holdup and holdout” is a recipe for weakening legitimate U.S. patent rights that are threatened by foreign infringers. American patentees already face challenges from over a decade’s worth of Supreme Court decisions that have constrained the value of their holdings. As I have explained elsewhere, efforts to limit the ability of the ITC to issue exclusion orders in the face of infringement overseas further diminishes the value of American patents and disincentivizes innovation (see here). What’s worse, the Report is not only oblivious of this reality, it goes out of its way to “put a heavy thumb on the scale” in favor of patent infringers, stating (footnote omitted):

If the ITC were to issue exclusion orders to SEP owners under circumstances in which injunctions would not be appropriate under the [Supreme Court’s] eBay standard [for patent litigation], the inconsistency could induce SEP owners to strategically use the ITC in an effort to achieve settlements of patent disputes on terms that might require payment of supracompetitive royalties. Though it is not likely how likely this is or whether the risk has led to supracompetitive prices in the past, this dynamic could lead to holdup by SEP owners and unconscionably higher royalties.

This commentary on the possibility of “unconscionable” royalties reads like a press release authored by patent infringers. In fact, there is a dearth of evidence of hold-up, let alone hold-up-related “unconscionable” royalties. Moreover, it is most decidedly not the role of antitrust enforcers to rule on the “unconscionability” of the unilateral pricing decision of a patent holder (apparently the Report writers forgot to consult Justice Scalia’s Trinko opinion, which emphasizes the right of a monopolist to charge a monopoly price). Furthermore, not only is this discussion wrong-headed, it flies in the face of concerns expressed elsewhere in the Report regarding ill-advised mandates imposed by foreign antitrust enforcement authorities. (Recently certain foreign enforcers have shown themselves all too willing to countenance “excessive” patent royalty claims in cases involving American companies).

Finally, other IP-related references in the Report similarly show a lack of regulatory humility. Theoretical harms from the disaggregation of complementary patents, and from “product hopping” patents (see above), among other novel practices, implicitly encourage the FTC and DOJ (not to mention private parties) to consider bringing cases based on expansive theories of liability, without regard to the costs of the antitrust system as a whole (including the chilling of innovative business activity). Such cases might benefit the antitrust bar, but prioritizing them would be at odds with the key policy objective of antitrust, the promotion of consumer welfare.

The FTC recently required divestitures in two merger investigations (here and here), based largely on the majority’s conclusion that

[when] a proposed merger significantly increases concentration in an already highly concentrated market, a presumption of competitive harm is justified under both the Guidelines and well-established case law.” (Emphasis added).

Commissioner Wright dissented in both matters (here and here), contending that

[the majority’s] reliance upon such shorthand structural presumptions untethered from empirical evidence subsidize a shift away from the more rigorous and reliable economic tools embraced by the Merger Guidelines in favor of convenient but obsolete and less reliable economic analysis.

there is no basis in modern economics to conclude with any modicum of reliability that increased concentration—without more—will increase post-merger incentives to coordinate. Thus, the Merger Guidelines require the federal antitrust agencies to develop additional evidence that supports the theory of coordination and, in particular, an inference that the merger increases incentives to coordinate.

The unifying theme of the unilateral effects analysis contemplated by the Merger Guidelines is that a particularized showing that post-merger competitive constraints are weakened or eliminated by the merger is superior to relying solely upon inferences of competitive effects drawn from changes in market structure.

It is unobjectionable (and uninteresting) that increased concentration may, all else equal, make coordination easier, or enhance unilateral effects in the case of merger to monopoly. There are even cases (as in generic pharmaceutical markets) where rigorous, targeted research exists, sufficient to support a presumption that a reduction in the number of firms would likely lessen competition. But generally (as in these cases), absent actual evidence, market shares might be helpful as an initial screen (and may suggest greater need for a thorough investigation), but they are not analytically probative in themselves. As Josh notes in his TRW dissent:

The relevant question is not whether the number of firms matters but how much it matters.

The majority in these cases asserts that it did find evidence sufficient to support its conclusions, but — and this is where the rubber meets the road — the question remains whether its limited evidentiary claims are sufficient, particularly given analyses that repeatedly come back to the structural presumption. As Josh says in his Holcim dissent:

it is my view that the investigation failed to adduce particularized evidence to elevate the anticipated likelihood of competitive effects from “possible” to “likely” under any of these theories. Without this necessary evidence, the only remaining factual basis upon which the Commission rests its decision is the fact that the merger will reduce the number of competitors from four to three or three to two. This is simply not enough evidence to support a reason to believe the proposed transaction will violate the Clayton Act in these Relevant Markets.

Looking at the majority’s statements, I see a few references to the kinds of market characteristics that could indicate competitive concerns — but very little actual analysis of whether these characteristics are sufficient to meet the Clayton Act standard in these particular markets. The question is — how much analysis is enough? I agree with Josh that the answer must be “more than is offered here,” but it’s an important question to explore more deeply.

Presumably that’s exactly what the ABA’s upcoming program will do, and I highly recommend interested readers attend or listen in. The program details are below.

Thank you to @senorrinhatch for recognizing that "uncertain patent rights will lead to less innovation because drug companies will not spend the billions of dollars it typically costs to bring a new drug to market..." https://truthonthemarket.co